what i think has happened

According to the Hong Kong Stock exchange:

Rule 14.06(6) defines “reverse takeover” as:

"an acquisition or a series of acquisitions of assets by a listed issuer which, in the opinion of the Exchange, constitutes, or is part of a transaction or arrangement or series of transactions or arrangements which constitute, an attempt to achieve a listing of the assets to be acquired and a means to circumvent the requirements for new applicants set out in Chapter 8 of the Exchange Listing Rules (the Preamble). A “reverse takeover” normally refers to:

(a) an acquisition or a series of acquisitions (aggregated under rules 14.22 and 14.23) of assets constituting a very substantial acquisition where there is or which will result in a change in control (as defined in the Takeovers Code) of the listed issuer (other than at the level of its subsidiaries); or

(b) acquisition(s) of assets from a person or a group of persons or any of his/their associates pursuant to an agreement, arrangement or understanding entered into by the listed issuer within 24 months of such person or group of persons gaining control (as defined in the Takeovers Code) of the listed issuer (other than at the level of its subsidiaries), where such gaining of control had not been regarded as a reverse takeover, which individually or together constitute(s) a very substantial acquisition. … "

It should also be noted that Rule 14.54 provides that:

"the Exchange will treat a listed issuer proposing a reverse takeover as if it were a new listing applicant. The enlarged group or the assets to be acquired must be able to meet the requirements of rule 8.05 and the enlarged group must be able to meet all the other basic conditions set out in Chapter 8 of the Exchange Listing Rules. … "

Now, according to these listing rules, the ELM takeover does not meet the reverse takeover requirement because neither ELM shareholders nor management will gain control of the combined entity. In simple terms, there is no change in control of DIngyi. This is what ELM and Dingyi's lawyers would have advised them and why they were confident of the deal proceeding as initially envisaged.

However, there is an important but unappreciated caveat in the Listing Committee Annual Report 2007 which the ELM/Dingyi legal teams (to their great shame given the fees they charge) appear to have overlooked. It is this:

In the Listing Committee Annual Report 2007, the Listing Committee confirmed that while paragraphs (a) and (b) of Rule 14.06(6) refer to two specific forms of reverse takeovers, **these are not meant to be exhaustive.** Transactions which are in substance backdoor listings but do not fall strictly within paragraphs (a) and (b) of the Rule may still be considered reverse takeovers subject to the Rules.

So, in my opinion, The HK Exchange determined that the Dingyi acquisition of ELM would constitute a reverse takeover for the following reasons:

- Following the aquistion, Dingyi will no longer retain any material operating assets and will cease to conduct its original principal business. Dingyi is in substance a listed shell.

- If Dingyi proceeded with the transactions and arrangements as submitted, the new listing requirements would be circumvented.

In other words, the exchange is concerned that if they were to designate this as a substantial acquisition instead of a reverse takeover, there would be insufficient disclosure about the nature of the mine etc to dingyi shareholders. By classifying this as a reverse takeover, the exchange is ensuring that dingyi shareholders will receive a level of disclosure comparable to an IPO or new listing.

The upshot of all of this is that if ELM and dingyi are able to meet the more stringent and exhaustive new listing requirements, the deal (or a deal) is likely to still go ahead (albeit delayed by many months and possibly with revised terms). If they feel they cannot meet these requirements, or if they feel the delay caused by meeting the new listing rules it too great, then they may decide to walk away.

While the breakup of the Uralkali cartel has lead to a modest fall in potash prices recently, global demand for potash is strong and looks to set to remain solid over the long term. According to bloomberg potash experts/analysts, prices are widely expected to return to pre-cartel breakup levels over the next 12 months or so. If we can believe what ELM management have said about the mine (and I have no reason to doubt what they have said), it is set to become one of the lowest cost potash mines in the world, with attractive (low cost) shipping access to Brazil and China. My guess is that, given the time and money already put into this deal, and given how attrative the assest is, Dingyi will do all it can to make this deal work. If the dingyi takeover does fall through, the ELM share price will likely fall back to pre-take over levels – but only over the short term. If the mine is as good as ELM have said it is, and if it really is potentially one of the lowest cost mid-sized potash plays in the world, I dont think it will take too long (relatively speaking) for ELM to find a new partner.